Tax Administration in the Digital Age: Globalization, Automation, & Taxpayer Rights

1. Tax Administration in the Digital Age:Globalization, Automation, & Taxpayer Rights Nina E. OlsonNational Taxpayer Advocate48th Annual Spring Symposium ProgramNational Tax Association18 May 2018

2. “Taxes are relational.” -- Lotta Bjorklund Larsen, Ethnographer/Anthropologist, 3rd International Conference on Taxpayer Rights (05.03.18) “But taxes are the lifeblood of government, and their prompt and certain availability an imperious need.” – Bull v. United States, 295 U.S. 247, 259 (1935).

3. Taxpayer Bill of Rights • Proposed by NTA in 2007 and 2013; Adopted by IRS in June 2014; Enacted by Congress in December 2015 in the Consolidated Appropriations Act, 2016, Pub. L. No. 114-113 • IRC 7803(a)(3): Execution of Duties in Accord with Taxpayer Rights: In discharging his duties, the Commissioner shall ensure that employees of the Internal Revenue Service are familiar with and act in accord with taxpayer rights as afforded by other provisions of this title, including --

4. Taxpayer Bill of Rights (cont’d) • The right to be informed, • The right to quality service, • The right to pay no more than the correct amount of tax, • The right to challenge the position of the Internal Revenue Service and be heard, • The right to appeal a decision of the Internal Revenue Service in an independent forum, • The right to finality, • The right to privacy, • The right to confidentiality, • The right to retain representation, and • The right to a fair and just tax system.

5. The Right to Privacy • Taxpayers have the right to expect that any IRS inquiry, examination, or enforcement action will comply with the law and be no more intrusive than necessary, and will respect all due process rights, including search and seizure protections and will provide, where applicable, a collection due process hearing. IRS Publication 1 (emphasis added)

6. The Right to a Fair and Just Tax System • Taxpayers have the right to expect the tax system to consider facts and circumstances that might affect their underlying liabilities, ability to pay, or ability to provide information timely. Taxpayers have the right to receive assistance from the Taxpayer Advocate Service if they are experiencing financial difficulty or if the IRS has not resolved their tax issues properly and timely through normal channels. -- IRS Publication 1 (emphasis added)

7. Taxpayer Rights Analysis: IRS Offshore Voluntary Disclosure Program

8. Taxpayer Rights Analysis:IRS Offshore Voluntary Disclosure Initiative

9. Taxpayer Rights Analysis:IRS Wage Verification Program (IVO) • Path Act § 201 (IRC § 6071) required employer W2s and employer Forms 1099-Misc (nonemployee compensation) to be submitted to IRS by January 31. • Path Act § 201(b) (IRC § 6402(m)) also required IRS to not release any refund on a return claiming EITC or ACTC before February 15. • IRS added “rules” to its fraud detection filters in its Return Review Program (RRP) to identify questionable returns based on the available data before releasing refunds. • Path Act changes commenced with 2017 Filing Season

10. Wage Verification Program Results(see 2017 Annual Report to Congress, MSP # 20) • IRS claims it protected $1.8 Billion in fraudulent or questionable Non-Identity Theft refund claims in CY 2017. • But butbut: False Positive Rate of 66% for CY 17 (through Sept)!!! • Note: FPR is measured only after IRS has approx. 14 days to review returns; thus the actual FPR of its rules and filters is much higher. • Filing Season 2018: If IRS doesn’t address in normal review period, it sends a letter to TP saying it needs another 60 days (already after Feb. 15) • Filing Season 2018: Taxpayer Advocate Service cases in this area have increased by 157% over last year.

11. Math Error for Claims Involving Dependents(see 2011 Annual Report to Congress, Vol. 2 Math Error Study) • Math/clerical error authority to summarily change incorrect dependent’s Taxpayer Identification Number (TIN), verified against other government databases, and disallow dependency exemption and any related credits, including the EITC. (IRC 6213(g)(2)(F)) • In 2010, IRS processed 141 M TY 2009 returns, issued 11.8 M math error notices, of which 300,000 resulted in additional tax due attributable to dependent TIN error. • Of the $176 M EITC claimed on TY 2009 returns with Dependent TIN errors, IRS disallowed $103 M through math error procedures.

12. Dependent TIN Math Error Study (cont’d) • TAS reviewed a representative sample of TY 2009 accounts in which IRS issued Math Error adjustments related to dependent TINs. • IRS subsequently reversed at least part of its dependent TIN math errors on 55 % of the returns with incorrect TINs, after TPs contacted IRS. • About 150,000 TPs had their refunds restored to them. • On average, IRS subsequently allowed nearly $2,000 per return after initial disallowance, with a delay of nearly 3 months.

13. Dependent TIN Math Error Study (cont’d) • TAS found that IRS had internal information sufficient to resolve 56 percent of the dependent TIN math errors. • Thus IRS could have avoided taxpayer burden and its own rework by analyzing and utilizing information in its possession and records. • Failure to do so cost the public fisc over $2.3 M in interest paid to these taxpayer for corrected math errors related to dependent TINs.

14. Dependent TIN Math Error Study (cont’d) • A significant number of TPs never replied to the IRS TY 2009 Math Error notice regarding incorrect Dependent TINs. • TAS sample found IRS could have corrected and allowed all of the dependent TINs in 41 % of those cases based on internal data. • IRS could have corrected and allowed at least one of the dependent TINs in another 11 % of the cases. • Thus, over 40,000 TPs who may not have received refunds they were entitled to, amounting to at least $44 M or $1,274 per TP.

15. Economic Hardship • IRC § 6343/Vinatieri – Release of levy where Economic Hardship • Allowable Living Expenses (ALEs): “Allowable expenses include those expenses that meet the necessary expense test. The necessary expense test is defined as expenses that are necessary to provide for a taxpayer’s and his or her family’s health and welfare and/or production of income.” IRM 5.15.1.7 (Oct. 2, 2012) • Currently Not Collectible (CNC)- Hardship: The IRS may designate an account as CNC-Hardship where “collection of the liability would create a hardship for taxpayers by leaving them unable to meet necessary living expenses. • IRC § 7526 – 250% federal poverty level = eligibility for representation by Low Income Taxpayer Clinic.

16. Economic Hardship – cont’d. • IRS does not have proactively or systemically attempt to determine whether taxpayer may experience economic hardship before issuing systemic levies. • Exception: Federal Payment Levy Program on 15% of Social Security Benefits – SSI and SSDI exempt; no levies on Social Security recipients with annual incomes below 250% Federal Poverty Level. (see 2008 Annual Report to Congress, Vol 2, Building a Better Filter: Protecting Lower Income Social Security Recipients from the Federal Payment Levy Program; see also 2016 ARC Vol. 2, IRS Should Use Its Internal Data to Determine If Taxpayers Can Afford to Pay Their Tax Delinquencies)

17. Private Debt Collection: 1 year results • As of 2nd quarter of FY 2018 (through March 29, 2018), IRS data show that of the taxpayer who made payments while their debts were assigned to Private Collection Agencies (PCAs):-- 46% had incomes below 250% Federal Poverty Level; and-- 43% who entered into an Installment Agreement had income less than their Allowable Living Expenses, meaning they did not have sufficient income to pay their basic living expenses.

18. Private Debt Collection (cont’d) • 2017 ARC recommendation: Define “potentially collectible inventory” to exclude taxpayers at or below 250% FPL, or whose incomes are below ALEs. • IRS response: “The fact that a taxpayer receives Social Security and reports income of below a certain level is not sufficient to conclude that the account is uncollectible….[w]hen a taxpayer self-identifies they are receiving SSDI or SSI, the PCA is required to return the account to the IRS.” – upcoming FY 19 Objectives Report to Congress, Vol. 2 (emphasis added)

19. Private Debt Collection (cont’d) • Congressional Response:In H.R. 5444, Taxpayer First Act, the House of Representatives unanimously passed Section 11305, which prohibits the IRS from sending to a Private Collection Agency “a taxpayer who is an individual with adjusted gross income, as determined for the most recent taxable year for which such information is available, which does not exceed 250 percent of the applicable poverty level (as determined by the Secretary).” [emphasis added]

20. 21st Century Tax Administration • “Big Data” should be used to assist taxpayers and reduce their burden, not just to nab taxpayers and raise revenue (sometimes incorrectly). • Predictive modeling, algorithms, internal data, ethnographic and psychological studies of taxpayer motivation and behavior – all are part of modern tax administration. • Performance measures that address taxpayers’ qualitative experience with the tax agency, future voluntary compliance, and trust in the tax system are as important and more effective in the long term than pure quantitative measures like number of audits, etc.

21. 21st Century Tax Administration cont’d • Email, social media, internet, online accounts, prepopulated returns notwithstanding:TALK TO THE TAXPAYER!Because: TAXES ARE RELATIONAL. • And see IRC 7803(a)(3)(D) – the right to challenge the position of the Internal Revenue Service and be heard.